The Archegos Capital Management Meltdown: Everything You Need to Know
The ‘Archegos Capital margin call’ resulted in the share prices of two of its speculated prime brokers crashing lower on Monday. We unpack the whole drama below.
The Archegos Saga
Before we look at what has been happening with Archegos over the last few days, the below summarises the 5-day share price performances of some of the key companies that we’ll discuss below. In no particular order:
- Credit Suisse -10%
- GSX Techedu -61%
- Nomura -15%
- Goldman Sachs -3.5%
- ViacomCBS -51%
- Baidu -20%
- Tencent Music -34%
- Discovery -41%
Everything You Need to Know
You’ve probably heard of Archegos Capital Management by now.
If not, here’s a quick refresher.
Run by ex-Tiger Management analyst Bill Hwang, Archegos Capital Management is a family office, which is speculated to have managed anywhere between $5-$10 billion. Or possibly more…
Hwang didn’t always run a family office though. Before that, he founded a hedge fund called Tiger Asia Management. But after the SEC charged him with insider trading and stock manipulation, Hwang settled with the SEC for reference, but he closed the fund and paid a small fine of $44 million.
In 2013, from the ashes of that run-in with the SEC he would start a family office called Archegos Capital Management.
Archegos Capital Management: A Complex Strategies Specialist
The key ingredient of this new fund would be leverage. According to Bloomberg, ‘Traders familiar with his orders describe Hwang running a long-short strategy with exceptionally large leverage.’
A key component of Archegos’ strategy, according to other reports, was the use of something called a total return swap or TRS, a leveraged instrument.
In the most basic of terms, a TRS is just an agreement between a firm and a bank(s). Under this kind of agreement, a firm like Archegos would make payments – at a fixed or variable rate, to its banks, and in return the banks would make payments to a firm like Archegos, correlated to the return of a particular asset or assets. In this specific case, those payments look to have been correlated to a basket of shares.
Key point: The structure of a TRS meant that regulators weren’t aware of Archegos' true exposure levels.
Beyond that, reports have begun to filter out that Archegos also made use of Contracts for Difference (CFDs), another leveraged product.
Exactly how levered the fund was overall – through its use of a combination of instruments – remains unclear. The Business Standard pegs Hwang’s total exposure at its peak to be around $50 billion.
Despite these uncertainties, it seems that Archegos had particularly concentrated positions in media and US-listed Chinese technology stocks, including: Viacom, Discovery, Baidu, GSX and Tencent Music.
Real problems started when some of those stocks began to decline last week.
The Viacom Example
Using Viacom as the key example, the stock was trading around its 52-week highs last Tuesday, at around $95 per share. Great for Archegos – as reports suggest they had leveraged exposure to a name that had gone up and up. In fact, over the last 6-months the Viacom share price had more than tripled!
Then on Wednesday the media giant announced it was looking to raise between $2.65 billion and $3.06 billion. The offering had two parts: selling 20 million common shares at $85 per share and 10 million preferred shares at $100 per share.
The company said it would use the funds raised for general corporate purposes, while also highlighting its intention to invest more aggressively in streaming services.
Regardless of what you make of this raise, the market didn’t like it.
On the day of the announcement the stock opened at $84.40 per share, before closing just above $70 per share – on significantly elevated volume – with 89.8 million shares trading hands during the session.
There was less of a frenzy the next day but the stock continued to slide, closing at $66.35 per share – with 44.2 million shares trading hands during the session.
Tencent Music had also faced selling pressure before last Friday’s event, and Baidu was trading lower on Thursday.
With some of Hwang’s big bets slipping, Archegos was hit with a margin call from its prime brokers, one of which has been confirmed to be Goldman Sachs. Others suspected to be involved, but not officially confirmed are Nomura and Credit Suisse – but more on that in a second.
Goldman Sachs Share Price ↓
When you’re hit with a margin call you can either deposit additional cash, liquidate unmargined securities, or sell your stocks.
Archegos couldn’t meet its margin call.
This led to intense selling pressure on Friday in a number of the names that Archegos had taken concentrated positions in, as its lenders dumped Archegos’ positions at a pace described as unprecedented. To illustrate that fact, on Friday ViacomCBS saw its share price crash 27% -- with 211.9 million shares trading hands. For reference, Viacom's average trade volume is about to 24 million. Discovery also crashed 27% last Friday on elevated volume.
One of the worst performing stocks embroiled in the Archegos saga has been GSX Techedu, which has now collapsed 61% in the last five sessions.
Reports said that the impact from this selling would be ‘immaterial’ for Goldman. The market took that as a positive sign, with the Goldman Sachs share price down just 0.51% yesterday. However, as we look at below, the same can’t be said for Nomura and Credit Suisse – who both flagged ‘significant losses’, but did not name Archegos as the catalyst.
Nomura Share Price ↓
On March 29, Nomura said that an event which occurred on March 26 with a US client which may lead to a significant loss for one of its US subsidiaries.
'The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26.’
The Nomura share price closed out Monday’s session down 16.3%, its largest intraday decline on record off the back of this news.
Credit Suisse Share Price ↓
Credit Suisse also warned investors that its first-quarter results would may be impacted a result of winding down the positions from an unnamed US hedge fund.
Unlike Nomura however, the quantum of the loss was not given a ball-park figure.
‘While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month.’
Credit Suisse said it would provide the market with an update on this matter in due course.
The market made its own back of the napkin calculations off the back of this news, bidding Credit Suisse 13.83% lower on Monday.
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